!«tDoa in liwestaKn! 




Copyright^ . 



COPYRIGHT DEPOSIT. 



Method In Investment 



BY 

Edward Whittemore Shattuck 

INVESTMENT COUNSEL 

New York 



The intelligent investor 
seeks the best method of 
securing the best return 
from the best securities. 









COPYRIGHT 1912, BY 

EDWARD W. SHATTUCK 



PUBLISHED MARCH. 1912 



INTRODUCTION. 

My associates and many of my other friends 
have been urging me to put on paper my theory 
of investment. I have tried to do so because I 
believe that few individuals possessing a more or 
less regular income and a desire to invest it with- 
out long periods of delay have a really effective 
method in making their investments. They have 
no definite studied plan. They have but little 
definite knowledge of the often obscure, yet ever 
present forces that effect future prices and future 
values. They do not understand the tracks these 
forces make nor the signs by which they can be 
determined. I shall show later that in the short 
swings of the stock market, prices may be going 
one way while values are tending in the opposite 
direction. 

Unfortunately, such investors usually wait until 
the newspapers and banking houses are very 
bullish. Then they buy stocks or bonds and it is 
probably on the high point for months. Too often 
the position of our press is governed by the market 
manipulators ; our papers are by nature bullish, 
and after an advance in prices they become most 
outspokenly so. At such times the market usually 
turns back for a few weeks at least. 

If the investment banker is questioned, he gives 
his advice as regards the securities which he has 



2 METHOD IN 

for sale. Such advice is in many cases satisfac- 
tory. The bankers who give their best judg- 
ment and attention to each client's individual 
need, should reap their reward. 

How many readers are able to scan a balance 
sheet and earnings statement intelligently ? Many 
statements are as Greek even to the expert. I 
find men taking some one figure and deceiving 
themselves into thinking that, as that figure is 
favorable, the rest of the statement must be. 

Investments need watching, exactly as one's 
own business does. It is our business to know 
about any company we are interested in finan- 
cially, even though we place the responsibility of 
operation upon other shoulders. 

The ever-recurring questions presented to the 
average investor read something like this : 

"I have some money now. How can I invest it 
to best advantage! Is it better to buy bonds or 
stocks at this time? What particular securities 
are cheap now? Can I invest to best advantage 
now or ought I to wait two, three or more weeks ? ' ' 

These questions I have attempted to answer, 
and I hope that these few chapters may be of as- 
sistance not only to those whom I serve as invest- 
ment counsel, but to all my readers. My recom- 
mendations are simply that every investor should 
have a definite plan or method to guide him, even 
as in his business, and not to invest spasmodically 
or in a haphazard manner. 

My theory of investment is greatly assisted by 



INVESTMENT 3 

and almost necessitates a study of the transac- 
tions in securities on our stock exchanges, the 
same plan that is used by the most careful spec- 
ulators. I refer to those who operate in the ten-to- 
twenty-point swings. 

But I shall not mention the speculators, in any 
way except to give the reason why so few come 
out ahead of the game. Men of little experience 
desire and expect to make 100% in a month or two, 
or some other abnormal acretion in capital. This 
very desire for excessive return with little effort 
on their part breeds the very cupidity which 
eventually leads to overtrading. "The appetite 
grows with what it feeds upon." Overtrading 
causes more failures in speculation than any other 
thing. The height of overtrading coupled with an 
entire lack of intelligent foresight defines gam- 
bling in stocks. The successful man in Wall Street 
is the one who expects a 10% to 20% return on 
his capital in one movement of several months; 
the man who can control his will — the calculating, 
careful man. 

Examples of the Westerner and Southerner 
teaching Wall Street a lesson are very common. 
One of them was a southern mining operator, who 
a few years ago sold his coal and iron properties 
for $3,000,000. Instead of teaching a lesson, he 
paid every cent of this for his lesson. 

In this book I disregard the dictionary defini- 
tion of investment and shall consider it the use of 
capital in such a way as to obtain the best return 



4 METHOD IN 

consistent with a high degree of safety. Such a 
definition eliminates from the category of invest- 
ment at once all securities issued by new untried 
companies whose officers do not see fit to give the 
truth, all the truth and nothing but the truth as 
regards their securities. Such offerings, unless 
placed by houses of the highest standing, should 
be scanned to see whether they promise wonderful 
returns and perfect security; whether they dis- 
course on the points which appeal to the eye and 
emotions, rather than to the intellect. Such pro- 
moters know that success is a stimulus immeas- 
urable, and they use it for all it is worth. 

The state of Kansas has come to recognize these 
features and it requires that a promoter or sales- 
man secure what really amounts to a license (see 
following page), giving him permission to adver- 
tise and sell a certain security. In no way does 
the state guarantee that the security offered is 
good, but state officials in charge do make an in- 
vestigation and secure sworn statements on a few 
of the vital factors. Thus the fake stock-pro- 
moting schemes are kept out. The farmers have 
been very easy, but they are learning to demand 
the state certificate and in other places to demand 
the information that that certificate stands for. 

Inquiries on any point made in this book, which 
are not clear or not thoroughly elaborated upon, 
will be gladly answered by personal correspond- 
ence. EDWAKD W. SHATTUCK. 
24 Stone Street, New York. 



INVESTMENT 



STATE OF KANSAS 

J. N. Dolley, Banking 

Bank Commissioner. (Seal) Department 

F. J. Partridge, 
Assistant. 

This Statement is to Certify, That John Doe has 
been duly registered with this Department, accord- 
ing to the provisions of House Bill No. 906, Ses- 
sion Laws of 1911, which became a law and went 
into full force and effect on March 15, 1911, as 
agent of 

John Doe Mining Company 
of New York City, New York, 

which Company is permitted to do business in this 
State under the provisions of the above-named 
law, and such registration entitles said agent to 
represent said Company as its agent until March 
1, 1912, unless said authority is sooner revoked by 
this Department. 

But this Department in no wise recommends the 
securities of the above-named Company offered by 
such agent for sale. 

In Testimony Whereof, I have hereunto sub- 
scribed my name. 

Done at Topeka, Kan., the 20th day of Decem- 
ber. 1911. 

♦1. N. Dolley, 
Bank Commissioner. 

A sample of the stock- vendor's license issued 
under the so-called "Blue Sky Law" by the bank- 
ing department of the State of Kansas. 



Distribution of Investments 

THERE is a largely advertised English 
theory, called the geographical distribution 
of investments, or an equal distribution in 
each of the leading countries of the world. 
Those who believe in this theory argue that 
the returns on investments, geographically 
distributed, are likely to average better in the 
long run than if capital were employed locally — 
that is, in one country — because the same factors 
are not working in all countries at the same time, 
but rather different ones, so that some countries 
are in a period of ascending prosperity while at 
the same time some are the reverse. It is directly 
antithetic to Carnegie's advice to place "all your 
eggs in one basket and watch the basket, ' f but this 
contains more of the elements of speculation. 

If we were to take a single country for our in- 
vestments, it would be hard to find one where 
security for capital is greater than it is in this 
country, or where a geographical distribution is 
better possible in a single country. The present 
political differences represent merely the uneasi- 
ness of a new generation of voters, a situation the 
like of which existed twenty years ago. We 
cannot help believing that the country will con- 
tinue to grow, regardless of politicians. Although 



INVESTMENT 7 

it may not grow as fast as some countries which 
are even newer than ours, nevertheless, any Amer- 
ican considers that the government of the United 
States is on a much more stable basis than those 
newer countries and that its natural resources 
are still capable of wonderful development. 

Need of Investigation. 

Then, too, we can watch securities in this coun- 
try much better. This includes the securities of 
western cities which need just as careful attention 
as if they were in South Africa. If the yield on a 
bond of a western city is very high, there must 
be some sound reason for it. Perhaps the city is 
over-grown ; perhaps it has only one or two lead- 
ing industries; perhaps the bonds are special 
assessment bonds and have as security only one 
or two streets with their abutting property. Local 
conditions are always peculiar and should be un- 
derstood thoroughly by the investor, or by an 
advisor who is not interested financially in selling 
those securities. 

One of the reasons for the irrigation bubble 
was the fact that people lost all ordinary business 
caution, and overlooked the fact that promoters 
were banking almost entirely on the future. The 
carelessness of investors is most commonly shown 
in the way they are led to take up these new 
security offerings. Irrigation bonds may be the 
fad; rubber stocks may have developed an ! 



8 METHOD IN 

teria — really speculative — which sends prices sky- 
ward. In Italy automobile stocks have been very 
much over-done. All of these securities are pop- 
ular for a time, and with their popularity, a great 
advance in the prices comes, but the smash 
eventually follows. 

Stock Movements. 

Like all other countries, our country has its 
period of boom times, followed by a period of de- 
pression. These may be regarded merely as a 
matter of action and reaction. One must follow 
the other. Stocks purchased in trade depressions 
are obtained almost invariably beloiv their in- 
trinsic value. The earning power of the proper- 
ties they represent is retarded, and that is used 
as a gauge for security prices, although the value 
of the physical property has not declined. 

Stocks purchased in boom times are obtained 
almost invariably at far above their intrinsic 
value. The attached chart shows the fluctua- 
tions of a group of securities. The main point to 
grasp is the fact that active stocks recede just as 
much below their real value in bad times as they 
advance beyond it in good times. If we have 
a speculative hysteria in the good times, we can- 
not get away from the panic which must follow 
in the bad times. Then, too, as the general move- 
ment of the big swings in prices lasting several 
years is mainly caused by changes in business 



INVESTMENT 9 

conditions — just so the movement of the smaller 
swings is governed largely by the position of the 
speculative operators. The study of transactions, 
through which they must operate, together with 
the study of money rates and a careful analysis 
of current news, makes possible the correct deter- 
mination of the big operator's position a good 
majority of the time. Stocks do not move in 
unison. Some fluctuate more than others, and 
western rails dependent on crops may drop off 
many points, when eastern roads are little affected 
and local public service corporations perhaps ad- 
vance. To pick out the best possibilities is there- 
fore work for an analyst — a specialist on invest- 
ments. 

There are those who consider that in boom times 
an investor should hold his money; that, in fact, 
there is only about a month out of every two to 
four years in which to purchase stocks. The rest 
of the time, they say that money should be saved 
and held for the coming period of extremely low 
prices. By the operation of this plan, much in- 
terest is lost. The lost interest amounts to from 
ten to twenty-five per cent, upon the purchase 
price of the security, and to be on a par with any 
plan where no interest is lost, an average purchase 
price that much lower must be secured. It is very 
difficult to tell when the bottom of a two or three 
year swing is actually reached, and if one is fairly 
near right, only three times out of five, he does 
very well. In the meantime, a lifetime has been 



10 METHOD IN 

consumed. During the years which he misses, he 
will probably overwait and have to purchase at a 
price by no means low. One could readily average 
a low figure over the whole period, if he purchased 
around the bottom of the various smaller move- 
ments, as the law of averages would help him. 
Not knowing whether we are in a big bear market, 
it is better to place part of an intended commit- 
ment at a fairly low price, so that if it proves to 
be the low of the big swing, success will result. 

Investors who receive capital at regular periods, 
and who desire to reinvest it at once, do so too 
often without method. By depending entirely on 
newspapers, they take big chances. A study of 
the financial columns for a considerable period 
will show that the newspapers are optimistic 
whenever there is any excuse for it; and they 
are the most outspoken about improving con- 
ditions after a considerable advance, when a turn 
backward is most likely. This may work fairly 
well in a long bull market, but hardly so in 
a period of distribution and the subsequent bear 
market, for papers influenced by the distributors 
are then even more bullish. 

Suffice it to say about bankers and brokers that 
their relation with their customers is the same as 
that of the grocers, the plumbers, the druggists or 
any other traders. Many give their best attention 
and judgment. Others limit their recommenda- 
tions to commodities upon which they make the 
biggest profit. But competition is active and 



INVESTMENT 11 

breeds good service, if demanded. It is one of the 
strange coincidences of the brokers' lot in par- 
ticular that some of them can hold the trade of a 
buyer, even if they treat him unfairly, while 
others lose a customer's business, through no 
fault of their own, but rather through a misun- 
derstanding, due to ignorance or suspicion. 

The market should be judged largely by 
itself, by the transactions which make it up, 
by the demand for money, and by the news, care- 
fully analyzed. These are particular features of 
my study of the market that will be given atten- 
tion in the last chapter. Why is it worth consid- 
erable money to an investor to receive an unbiased 
report on these current conditions of the market? 
Take for example the month of July, 1911 ; during 
this period the newspapers and most of the bank- 
ing houses were very bullish. A purchaser who 
bought five shares of United States Steel common 
and five shares of Union Pacific common during 
that period would have paid about $80 and $190 
per share, respectively. About two months later 
these stocks sold several points below $55 and 
$160. His income would be increased by over 
25%. In other words, the same capital would 
have purchased at the later date six shares of 
Union and seven shares of steel, instead of five 
shares of each. In this small transaction involv- 
ing $1,350. he would have saved by waiting a few 
we< &8, $275. 

This is a case where a studv of transactions 



12 METHOD IN 

and of the money conditions, and a careful anal- 
ysis of the news showed that the big operators 
were selling stocks ; and the investor should have 
waited. 

In the same way that investors buy stocks in 
general when the current advices are most op- 
timistic, just so do they buy the article that is 
most advertised. Not only does the advertisement 
of a big issue cover much paid-for space, but the 
wide-awake advertising agent always gets into the 
news columns a glowing story of his proposition. 
Manipulation not only in the stock market, but in 
the news columns, precedes the advertisement for 
a period of several weeks, for the purpose of giv- 
ing favorable impressions when it does eventually 
appear. This custom of subsidizing the reading 
columns of the press is a disgrace. It is not con- 
fined to the sale of good and mediocre security 
issues, but includes the doubtful and bad. It does 
not influence the experienced investor as much as 
it does the inexperienced. Surprising as it may 
seem, the religious journals contain the very 
cheapest class of financial advertising. 

Bonds as Investments. 

What should one do with his capital when stock 
prices are abnormally high and when the best 
class yields only a very low rate of interest — even 
less at times than interest on high-grade bonds ? 

Bonds are the logical alternative at such times ; 



INVESTMENT 13 

and first, I will briefly name the qualities that 
render bonds suitable for such investment: — 

(1) Stability of price. 

(2) Security as to principal and interest. 

(3) Marketability of bond or convertibility at 
any time into cash. 

(4) Good net yield on investment. 

A bond having one of these four qualities in 
abundance is, without doubt, lacking in some other 
quality. This is an axiom with bankers, and little 
understood by investors. For instance, a readily 
marketable bond will not yield as good a figure as 
one which has no ready market, although princi- 
pal and interest may be just as well secured. 

Investors in Two Classes. 

In taking up the question of bond investments, 
I shall divide investors into two classes: — 

(1) Those who buy to hold permanently and 
who do not intend to sell out at any time for the 
mere purpose of re-investing. 

(2) Those who give considerable attention to 
their investments, and from time to time, re- 
invest in securities in which the possibilities of 
improvement in price are greater. 

The investor who buys securities and considers 
them a permanent holding should not be especially 
interested in holding readily marketable bonds. 
Of course, there is always a market for unlisted 
bonds at a price, but this price is often five, or 



14 METHOD IN 

perhaps ten, points lower than the purchase price, 
due to the fact that the selling expense is so great 
on this particular grade of bonds. The very fact 
that the market is limited, allows a better return 
on the investment. Beady marketability is worth 
several per cent, of the par value, so an inactive 
bond should be purchaseable that much below an 
active bond of no better security. There is a dif- 
ference of several points in the bid and asked 
prices of bonds of a limited market. There is a 
difference of only a fraction of a point in the bid 
and asked prices of bonds of an active market. A 
safe rule therefore is to refrain from any ex- 
changes of bonds, except on a basis of genuine 
bid prices — not asked prices. 

The business man, who expects to use his bonds 
for security in case he needs to borrow money, 
should purchase active bonds currently quoted on 
the exchanges. 

The persons comprising Class two — who give 
considerable attention to investment — should be 
willing, when stock prices are low, to exchange 
bonds for stocks, and when stock prices are high 
they should sell stocks and purchase bonds whose 
primary feature is stability in price and a 
ready market. When active listed bonds are 
purchased, care should be taken to secure 
bonds that always have a ready market and 
whose fluctuations are within very narrow limits. 
In this way, when the stock prices are very low, 
such an investor can sell his bonds at perhaps five 



INVESTMENT 15 

or ten points below the purchase price; and then 
buy stocks which are 50% or more below their 
high prices. 

An investor logically asks why, if the bond will 
probably decline in price some ten per cent — why 
would it not be better to deposit the funds in the 
bank. 

In the first place, enough interest would be 
gained to make the investment in bonds at that 
time practically pay for itself. 

Furthermore, it very much diminishes the 
temptation to reduce capital to satisfy immediate 
desires. It thus protects funds from impairment. 
The necessity for a majority vote in three-fourths 
of the states protects the national constitution 
from a hasty change. It takes more than an undi- 
gested popular opinion to amend it; it requires 
mature thought. The investor will not take the 
trouble to sell a security and buy an automobile, 
as quickly as he will draw a check without any 
effort to do the same thing. It is human nature 
to follow the path of least resistance. If capital 
remains uninvested and therefore unprotected, 
the emotion of a moment is likely to carry forward 
some plan of luxury, which upon mature thought 
would be regretted. 

Then, too, money standing in a bank during 
times of great prosperity may be very detrimental 
to the steady growth of the nation. Hoarding 
at that time would serve economic purposes bet- 
ter. In case the funds represent business profits 



16 METHOD IN 






or current income from investment, and come 
from other bank deposits, its hoarding has a slack- 
ening effect upon excessive loans. But if the 
deposit represents profits from foreign trade, it 
becomes a basis for additional loans and increases 
the menace of credit over-extension, always 
apparent during such periods. Apparently it is 
liquid capital and is used for current business 
requirements. Actually it is fixed capital, or will 
be turned to that purpose during a subsequent re- 
action in business when stock prices warrant re- 
investment. Such a deposit, therefore, brings 
additional distress upon the industries of the 
nation, in the subsequent period of depression. 

Short-term notes or commercial paper are also 
very acceptable investments in a high market, 
although they should be issued by a corporation 
of highest credit and should represent mercan- 
tile transactions. It is difficult to secure the best 
grade paper, as the banks are always on the look- 
out for it, and it is usually in large denominations. 



Securities in Ten Divisions 

ANYTHING based on the law of averages has 
a most stable foundation. The business 
of our prosperous insurance companies is an 
example. In some such way, investments should 
be based on the law of averages. All of one's 
money should not be tied up in unmarketable 
securities of great potential value; nor all in 
rails; nor all in industrials; nor all in public 
service corporations; nor all in mining com- 
panies ; nor all in real estate or real estate trusts ; 
nor all in government securities; nor all in 
bank or insurance company stocks. The only 
exception could be the matter of a personal busi- 
ness in which investment is coupled with personal 
services and attention. 

Investments should be distributed geographic- 
ally and subject to different industrial conditions. 
Their value should not depend on the prosperity 
of any one class throughout the entire country, 
nor all the classes of any one section, except where 
one confines himself to his own district, with which 
he is perfectly familiar. In such a case, there is 
no objection to local investments exclusively, if 
the district affords sufficient diversity of oppor- 
tunity. 

There are ten main divisions of securities in 



18 METHOD IN 

this country. These securities move in price more 
or less in unison, and this is especially true of the 
active railroad and industrial stocks. The few 
public service corporation stocks are gov- 
erned more by local conditions as regards 
the short swings of several months and only 
move with the others on the long swings of 
several years ' duration. Few mining stocks are 
listed in New York, but Amalgamated, American 
Smelters and Utah Copper move in general with 
the rails and industrials — although governed to 
some extent by special conditions. The principal 
market for other copper stocks is in Boston, in the 
same way that the principal market for grain is in 
Chicago. 

The prices of the principal listed stocks move 
over a big average range, as shown in the 
appended statement of averages. During the big 
price swings of about twenty years, business has 
a period of prosperity and a period of depression. 
The minor sivings of several years are governed 
by action and reaction of business. The price 
movements of several months' duration are gov- 
erned by the position of the big manipulators, 
operators and investors. The men who buy from 
hour to hour and day to day make up the class of 
men, and oftentimes women, who stand over the 
ticker as men and women stand over the roulette 
table in Monte Carlo. This class changes rapidly, 
and its members invariably lose, not only in a 



INVESTMENT 19 

financial way, but in due time physically and 
morally. 

I believe that on the average, the best return 
from investment is made not by purchasing stocks 
only at the low point of the price movements of 
several years, but by purchasing currently, as one 
has funds, securities which are, at the particular 
time especially cheap — perhaps bonds and per- 
haps stocks. Such investment, of course, should 
be subject to the development of several localities 
and of several industries. 

Except in boom times, there are some stocks 
which are exceptionally cheap, and they can be 
located by one who has the facilities and time to 
search over the entire field. He can find them 
just as surely as the dealer in real estate can 
place the land of greatest potential value. 

Investors should purchase stocks when the big 
operators are accumulating. If ready for invest- 
ment when a careful study of transactions, loaning 
rates and an analysis of the news shows that the 
operators are selling stocks, they should wait a 
few weeks. At all times they should ignore the 
newspapers. Their columns are usually intended 
for the day-to-day trader — not for the investor. 
And when the newspapers become most outspoken 
in their optimism in regard to securities, it is safe 
to say that one should never purchase stocks. 
Every investor should act independently, buying 
stocks when lie considers the price low and buying 



20 METHOD IN 

bonds of a stable character when stock prices are 
too high. 

In this way a low average purchase price and 
yield of over 6% should be made with perfect 
safety, and I mean "with perfect safety/ ' unless 
this whole country of ours with its fine industries 
goes into bankruptcy. The securities to be taken 
should include only the strongest stocks and 
bonds. 

Ten Divisions: 

1. Eailroads. 

a. New England and Middle Atlantic 

Group. 

b. Southern Group. 

c. Central Group. 

d. Western and Transcontinental Group. 

2. Local Public Service Corporations. 

a. St. By. and Traction. 

b. Gas Lighting. 

c. Electric Lighting. 

d. Water and Water Power. 

3. Industrials. 

4. Telephones and Telegraphs. 

5. Steamships. 

6. Mining (Principally Copper). 

7. Eeal Estate Trusts. 

8. Banks. 

9. Insurance Companies. 
10. Government and Municipal Bonds. 



INVESTMENT 21 



Railroads. 



I regard railroad securities as the class which 
can be analyzed with the greatest certainty that 
one's conclusions are correct. There are enough 
statistics available to show the policy of the com- 
pany and, taken with a present-day knowledge of 
the road as it is, its equipment, its traffic, and its 
regular monthly earnings statements, one is very 
well able to judge what the securities ought to be 
worth. The monthly earnings statement is an 
important feature. Publicity is one of the great 
safeguards. Too few people realize this, espe- 
cially those who can be tempted to consider new 
offerings where the figures given are the prospects 
rather than the actual performances of a company. 

Public Service Corporations. 

Investors should confine their interests in pub- 
lic service corporations to propositions in locali- 
ties with which they are perfectly familiar, or to 
companies which court publicity rather than run 
away from it. Only the weak are afraid to have 
their actions made public. 

There are now some holding companies which 
own local properties in the different leading cities 
of the country. Some of these companies are 
very much over-capitalized and bank largely on 
the future, but their principle is right, as it is 
based on the law of averages and on the fact thai 



22 METHOD IN 

failure in one community does not largely affect 
the grand total of all the companies. 

This lament comes from a copy of the Manufac- 
turers Eecord issued at Baltimore: 

"The South Throws Away Money. 

"As though there were not sufficient op- 
portunities in the South for the investment 
of money, it is said that many Southern and 
Western people have lately been completely 
taken in in the purchase of town lots on Long 
Island. If the people of the South would only 
retain at home the millions of dollars that 
they annually throw away in wildcat schemes 
of one kind and another and widely-adver- 
tised, wonderful world-revolutionizing pat- 
ents, in playing the cotton market in New 
York, where they are constantly artistically 
skinned, this section would get rich very much 
more rapidly than it is doing.' ' 

The franchise of a public service corporation is 
one of its very important assets. For the most 
part, a franchise covers a period of twenty to 
fifty years. Bonds of such a company should al- 
ways mature several years before the important 
franchises. The holder of stocks should regard 
the special privileges of a franchise in the same 
light that one regards the premium on a bond. 
This is charged off from the interest received, 
so, as the bond nears maturity, the price tends 
toward the par value. In the same way, the value 



INVESTMENT 23 

of the stock tends towards the value of the 
property at the date of maturity of the franchise 
either as it could be sold to the city, or its 
value under a franchise without special privi- 
lege. Stocks of companies which are habitually 
in trouble with the city in which they operate 
should be left alone as an investment, unless the 
security is selling at a figure which discounts all 
possibilities. 

Franchises usually allow for competition or else 
for regulation, and sometimes, as in the case of 
the street railways in Chicago, for purchase by the 
city, under a specified valuation. As long as the 
terms are definite and known, all is well, but 
otherwise under our political system, sudden 
changes are likely to occur to affect the 
stock vitally, and perhaps the bonds. Sudden 
changes for the better are few. The growth is 
gradual and pretty sure. Big changes in this 
class, when they come, are always on the wrong 
side. 

Public Service Corporation bonds are, for the 
most part, of the inactive class, yield around 5%, 
and are often good investments for the man who 
buys as a permanent holding. It is not usually 
easy to sell them at the cost price, unless bought 
under unusual circumstances. The exceptions to 
the rule are the listed securities, issued by the 
companies operating in our largest cities — such 
as Consolidated Gas Co. of New York, People's 



24 METHOD IN 

Gas Light & Coke Co. of Chicago, and Massachu- 
setts Electric Companies of Boston. 

Public Service Corporation stocks often repre- 
sent merely the promoters' expense and profits 
and not real money. A prospective investor 
should, therefore, know the situation and use his 
practical business sense. 

The New York street railway situation is an 
example of the dishonesty which lack of publicity 
breeds. Human nature is the same everywhere. 
The humble farmer does not differ very much 
from the millionaire. Both have their ambitions 
and are more likely to be dishonest if they 
think they will not be detected — or, in other 
words, if publicity is the exception, rather than 
the rule. 

Gas and electric companies should have large 
depreciation accounts and unless they do, the 
company is sure to go on a downward path. 

Water companies usually have steady earning 
power. Possible competition from the city should 
be allowed for in the terms of a franchise. 

Water power companies might come under this 
category. New propositions of this character are 
almost as speculative as mining companies. The 
management is a very essential feature. Even the 
law of averages does not take account of the sud- 
den onslaughts of nature; and a dam or runway 
built for average conditions or for the worst condi- 
tions in ten years does not allow for extraordinary 
storms, long periods of drought, or long periods 



INVESTMENT 25 

of immensely cold weather. New records are con- 
tinually being made. Insurance against flood and 
breaking of dams is not in vogue; and when a 
flood carries away the dam — the most valuable 
part of a water power property — it destroys out- 
right a very large equity behind the securities. 

Industrials. 

Factories used to be the personal property of 
individuals. Many remain so. But the economic 
tide towards combination has been such that part- 
nerships have not been as satisfactory as cor- 
porations. This has brought forward the honest 
promoter of great ability as well as the unscru- 
pulous promoter. Both see future profits, one 
with a clear eye and one with a glass darkly. Both 
capitalize the future, and one usually makes good, 
where the other does not. In a word, that is the 
position of our industrials to-day. Regardless of 
control of prices, combination up to a certain point 
works for greater economy, and the economy rep- 
resents either (1) salaries of men who are not 
needed, or (2) greater efficiency in using the serv- 
ices of men, or (3) savings of waste material, by- 
products, etc., possible only by operating on a very 
large scale, or (4) saving in purchases. These 
savings are genuine and the profit to the com- 
pany is actual. If an organization can by unify 
of action exclusively control both the cost price 
and the selling price of its product, we term it a 



26 METHOD IN 

monopoly. Because a company is large, it is not 
necessarily a monopoly — nor because it controls 
over 50% of the trade. That is not logical. 

Now — are stocks, representing combinations, 
possibly monopolies, good for investment? The 
leading industrials are combinations of some 
kind, and many of them have doubtless been law- 
breakers so far as the Sherman law is concerned. 
Only those should be purchased which are below 
their intrinsic value, and this is exceedingly dif- 
ficult to determine owing to the multiplicity of 
factors involved. 

Next to capitalization and financial condition, 
the most important factors as regards industrials 
are (1) whether the article of manufacture is a ne- 
cessity or a luxury; (2) whether a lowering of the 
tariff would weaken the company's position; and 
(3) whether a monopoly or a control of prices is 
essential to the present earning power. Many 
men are more particular when buying a raincoat 
than they would be in purchasing rubber stocks. 
We know there are very great profits and some- 
how suppose that the owners get large returns. 
With ten times as large a capitalization as there 
ought to be, one should not be surprised at the 
insignificant return. 

Telephone and Telegraph. 

The few telephone and telegraph companies are 
subject to the several-year swings, being prosper- 
ous or less so in accordance with the average bus- 



INVESTMENT 27 

iness of the country. The fluctuations are not 
very great because the earning power can be esti- 
mated pretty accurately. These stocks are held 
largely by investors. 

Steamship. 

The popular heresy that steamship subsidies 
would not be worth the plum they offer to poli- 
ticians and capitalists, has kept the subject out of 
question now for many years. President Taft is 
frank enough to say that a merchant marine can- 
not be built without them, if it is to compete with 
the subsidized foreign companies. Some day we 
may have enough pride to mend our ways in this 
matter; but at present our entire fleet consists of 
only a few coastwise lines, a very few ocean lines 
and several lines on the Great Lakes. Most of 
the bonds issued by the inland companies are se- 
cured by a mortgage on the individual boats. The 
mortgage should have a 10-to-20-year sinking fund 
provision, and the boats should be insured above 
the amount of the mortgage. When bonds are 
secured by mortgage on all the company's prop- 
erty they have the law of averages with them and, 
provided with a generous sinking fund, should be 
fair for permanent investment. Such companies 
are easily subject to competition and their securi- 
ties have no ready market. 

Stocks of these companies are very speculative. 
With two exceptions, they are not listed and have 



28 METHOD IN 

a very narrow and erratic market. Suffice it to 
say that the stocks are a good purchase only for 
one who has first-hand knowledge of the peculiar 
conditions. 



Mining. 

The silver and gold mines whose securities are 
offered would well be eliminated from discussion 
at once. New offerings are almost invariably of 
a very cheap character. Promises are abundant. 
Eesults are few. The working mines are not being 
offered for a song. Of lead, zinc and smelting 
companies, there are a few listed in Boston. 

Of copper companies there are many — good, 
bad and indifferent. The speculative nature of 
these, it should be understood, is present — no mat- 
ter who the directors are, and regardless of the 
location of the property. Calumet and Hecla in 
its youth looked hopeless and sold at prices which 
showed it. The late Professor Agassiz of Har- 
vard University had the perseverence and the 
geological knowledge to stick to the company, and 
he made good, wonderfully good. But had he tried 
some other property he might have been digging 
around until his death and not found a good pay 
streak in it. Such is the vagary of the miner. 

Many of the listed stocks represent small mines 
at present either paying or prospecting. Calumet 
and Hecla (a lake property) and Amalgamated (a 
Butte company) represent large groups of prop- 



INTESTMENT 29 

erties some of which must be of great value. 
These companies also spend great sums of money 
prospecting for new mines, and much of this 
money is sunk, never to come up again. The per- 
manence of these companies seems assured owing 
to their extent. 

Another class, including Utah Copper Company, 
is known as the porphyry coppers. Machinery, 
improved only within the past few years, has 
made possible the digging and crushing of very 
cheap pay dirt. This is of very low grade, merely 
gravel shoveled and ground. Companies operating 
these properties are still experimental, although it 
is believed by some that they will prove to be the 
most stable of copper producers. As usual, most 
of them are overcapitalized. 

Profits of mining companies can be reckoned on 
a share basis, somewhat as follows : 

Osceola Consolidated Mining Co. in 1910: — 

Produced Copper 19,346,566 lb. 

Cost, including prospecting, etc., 

per lb 9.37c. 

Average selling price for year, 

per lb *.... 13.04c. 

Profits— total for year $758,586.00 

Profits per share issued $7.89 

Prices of copper stocks are governed very 
largely by the trend of copper metal quotations. 
These run in swings of seven-year periods, as 
shown on the accompanying map. Our best au- 
thorities do not feel that the advent of the por- 



30 METHOD IN 

phyry mines will increase the supply enough to 
permanently affect prices. The increase in de- 
mand is steady and should entirely offset the new 
supply in several years. 

Real Estate. 

Few, if any, real estate stocks are listed, and 
but one or two issues of bonds. Savings banks are 
very glad to take real estate mortgages and those 
offered to the public have either (1) been refused 
by the banks owing to over-capitalization, or (2) 
are secured by large pieces of city property. If 
the natural conditions are good, the earning power 
sufficient, and a sinking fund competent, the bonds 
should be a good purchase for permanent invest- 
ment. In certain states, such securities are tax 
exempt, and this ,too, is of great advantage to the 
holder. The market for this class of bonds is, as 
a rule, narrow and the price is governed almost 
entirely by local conditions. 

Bank and Trust Companies. 

There is a ready market for the leading bank 
and trust company stocks. The quotations for 
New York bank stocks are very high, i. e„ Bank- 
ers Trust Co., over $600 per $100 share ; and First 
National Bank, over $1,000. Stocks selling at such 
premiums do not help along the cause of a central 
banking institution, for demagogues will surely 



32 METHOD IN 

say of any plan, that it is by the banks, of the 
banks and for the banks. If a number of banks 
stocks were purchased, a rather low average re- 
turn would be maintained. If the investment were 
confined to one bank, there would be great possi- 
bilities either way, for the fluctuations at times 
are very erratic. The energy and honesty of the 
managers is too vacilating an asset for stability, 
as is also the danger in time of financial stress; 
and where fluctuations cannot be analyzed intelli- 
gently, stability should be a necessity. 

Insurance. 

Insurance company stocks, if purchased at a 
fair price, are good investments. Differing from 
bank stocks, these have very great stability, except 
in case of the fire companies. The San Francisco 
earthquake and other big fires are accidents which 
may be likened in banking to a panic. The life 
companies in this day of antiseptics and germ 
statistics are free, to a large extent, from the 
danger of great epidemics or disasters to the class 
of men who take out insurance. 

Government and Municipal Bonds. 

Our Government bonds today are selling on an 
artificial basis — not on a basis of investment 
(except the Panama 3's). Any banking plan will 
doubtless provide a different basis for the cur- 
rency of our growing country than the fixed, and 
even contracting, amounts of Government bonds — 



INVESTMENT 33 

the only security allowed as a basis of issue, except 
in time of panic. The natural yield of bonds of 
the United States Government cannot be deter- 
mined until the extent of the demand for them is 
known, eliminating this artificial demand for cur- 
rency purposes. For example, quotations of Eng- 
lish Consols have declined steadily since '1897 
from a basis to yield less than 2*£% to a basis to 
yield over 3y$%. We cannot tell what our bonds 
would have done during the same period. 

State bonds in this country are of the best for 
investment, but there are few new offerings and 
the present issues are closely held. The yield of 
these bonds, as of all bonds of unfailing security, 
moves usually in sympathy with the money mar- 
ket. This statement, of course, excepts the gov- 
ernment bonds used for circulation purposes. 

Municipal bonds, as a class, are the best for 
purchase when stock prices are very high. It is 
surprising that during boom times, stocks do not 
yield a rate higher than bonds. The beauty of in- 
vestment in municipal bonds at such a time is the 
fact that when reaction does come with its panicky 
conditions, there is usually a good demand for the 
bonds, owing to the fact that money for invest- 
ment runs to these safer channels. 

However, investors should carefully note (1) 
that the legality of the issue is vouched for by 
some leading attorney, employed by the banker 
selling the bonds; (2) that the bonds are not a 
"special tax" or "special assessment' ' issue, as 



34 METHOD IN 

the security is always doubtful; (3) that the bonds 
are issued by a town of at least 50 years' stand- 
ing without a default and whose total bonds do not 
exceed 5% or 10% of assessed value; or else by a 
city of over 30,000 inhabitants with varied indus- 
tries; or by a smaller locality, the particulars of 
which the individual personally knows. Do not 
consider a western or southern bond, unless the 
yield is higher and unless you personally know the 
peculiar local conditions. 



Intrinsic Values 

Intrinsic Value as applied to stocks, suggests, 
very likely, to those who have not given the mat- 
ter attention, a ramification of intricate and tech- 
nical mental operations, which only the expert 
may attempt to master. An examination of the 
term, however, will disclose its comparatively 
simple freedom from such ramification. It is true 
that this phase of the general subject of invest- 
ment affords a broad field for research and study, 
but nothing within its scope is beyond a clear un- 
derstanding to the average person. Every pur- 
chaser of securities ought himself to know values 
and what determines them. The country horse 
trader must know the value of horses in 
order to be a successful trader in them. It is 
only common prudence. This simile of the 
horse trader could be carried further, because 
every one knows that the degree of his success 
depends upon his ability to size up the other man, 
as much as upon his knowledge of what we may 
call the intrinsic value of horses. Just so the 
degree of success of the investor depends upon 
his ability to size up fundamental subjects bearing 
on securities, as much as upon his knowledge of 
the intrinsic value of securities. The present 
chapter will be confined to a discussion of intrinsic 
value per 



36 METHOD IN 

The country horse trader knows horses. After 
a sort of physical examination of a given animal 
he can judge very closely what it is worth as a 
horse — that is, compared with others in the same 
class. He knows men and divides them, somewhat 
as he does horses, into classes ; only, of course, in 
respect to their brains or common sense, instead of 
muscles. He has said that most men, even farm- 
ers, know little about the good and bad points in 
a horse, and that it is an easy matter to take 
advantage of this ignorance. He was unscrupulous 
and made money until his reputation became too 
well known. It therefore behooves one who buys 
horses for an investment, or to sell again, to learn 
all he can about horses — as it does for one who 
buys stocks to learn all he can about stocks. 

But to return to our subject, it can be set down 
as generally admitted that there is no cut-and- 
dried formula that can be followed in determining 
intrinsic value in stocks, any more than in the 
case of horses, because of the great variety and 
number of factors upon which such value depends. 
Each stock must be considered with relation to its 
own particular merits and demerits. But there 
are general lines of investigation into these merits 
and demerits that apply to all stocks, so that even 
the slight knowledge gained in this way would 
enable one at least to recognize what stock repre- 
sented an investment and what a speculation. 
What these lines of investigation are, and how 
familiarity with them will educate and thus pro- 



DIVESTMENT 37 

tect the average investor, I will attempt to set 
forth briefly and simply. 

Stocks and Bonds. 

A stock certificate represents ownership in a 
property or business; but the business may be 
mortgaged, which would be represented by bonds 
which must be paid by the proprietors at some 
future date. There may be two or three mort- 
gages on one division of the property and 
a single mortgage on another part, these 
being all different issues of bonds. Then, too, 
the business may have notes outstanding either 
unsecured or secured by collateral in the shape of 
bonds and stocks owned, and these are an obliga- 
tion of the owners — the stockholders. It is clear, 
therefore, that if the bonds of a company are 
worth little, the equity above the bonds or the 
stock must be worth very little indeed. 

Take a property valued at $4,500. If it is mort- 
gaged for $4,000, the ownership of the property 
is worth the difference, or $500. If this owner- 
ship worth $500 is represented by 40 shares of 
stock totaling $4,000 par value, it is worth only 
12% cents on the dollar par value. But there are 
also $300 notes outstanding. The presence of 
these $300 notes tends to make the value of the 
stock, while the company is solvent, that much 
less, or only 5 cents on the dollar par value. If 
the owner failed, his interest represented by the 



38 METHOD IN 

stock would be preceded by the obligation of the 
notes as well as of the mortgage. 

It is a fact that in receiverships, some such note 
issues have fared little better than the stock. 
This is so because failures are usually caused 
either by lack of capital or by net earnings after 
expenses too small to pay the fixed interest and 
rental charges. The purchasers of the property 
under foreclosure must advance the new capital 
needed. The noteholders as a rule have been un- 
willing to take the responsibility, because the total 
issues are small compared with the total capitali- 
zation of the property. Therefore, if the stock- 
holders wish to retain an interest in the reorgan- 
ized company, they must take the property on a 
basis which the courts consider equitable to all. 

In a nutshell, the above comparison shows the 
status of any incorporated company. Outside the 
physical valuation, its value depends largely upon 
the ability of the property to earn money. Part 
of these earnings may be put in the bank or spent 
on improvements, and considered a surplus, and 
part may be taken and consfdered as a dividend. 
Whether it goes to surplus or to dividends, it is 
the stockholders', and intrinsic value depends 
more on this earning power than on the amount 
paid in dividends. 

Nothing could be more simple than this. To de- 
termine the value of a stock, we must investigate 
the earning power of the business in which a given 
stock represents part ownership. No two com- 



INVESTMENT 39 

panies, even if in the same class, are absolutely 
subject to the same influences. Only general direc- 
tions can be given as to the determination of in- 
trinsic value. Of course, intrinsic value implies 
that there is an equity behind a share of stock; in 
other words, a proportionate share in the prop- 
erty of the corporation above its debts, and this 
may be pretty definitely arrived at if we know the 
value of the property. In some cases where the 
earnings over expenses and charges are little or 
none, and the possibility of improvement little, 
intrinsic value represents merely the value of the 
voting power, or ,in other words, the power to 
operate the business. 

United States Steel. 

The intrinsic value of United States Steel shares 
has been variously estimated from $20 to $60 per 
share. That is, if the property of the Steel Trust 
were sold, an owner of one share would receive 
that much money. But stock is bought, not to re- 
ceive an actual and proportionate share of the real 
selling value of the property, but to receive a share 
in the success and the profits of the business as a 
going concern. The intrinsic value of U. S. Steel, 
then, must be determined by the earning power of 
that corporation, and the earning power, of course, 
is influenced by industrial conditions, political 
exigencies and various other factors. At times 
there is great uncertainty in the minds of invest- 



40 METHOD IN 

ors>, and speculators as well, as to what the future 
earning power of the United States Steel Cor- 
poration will be, because that depends so much 
upon the outcome of governmental investigation 
and probable changes in the tariff, although some 
aver that the Steel Trust no longer needs a pro- 
tective tariff. Perhaps some who can see through 
this maze of uncertainties may have reason to 
believe that the future earning power of the U. S. 
Steel Corporation will not be impaired, but will 
grow stronger, in which case they believe that the 
shares are selling below what they are really 
worth. In other words, they may believe that the 
5% dividends now paid — at which rate the stock 
at 60 has an income value of 8 1-3% — will continue 
to be paid, or, at least, be reduced by no more than 
1%. Others may be convinced that the govern- 
ment is bent on smashing the Steel Trust, 
or that, as a result of unfavorable tariff changes, 
the earning power will be greatly diminished, and 
that even present prices of the stock have not dis- 
counted a future diminished earning power which 
they believe inevitable. 

It is obvious that there are many things to be 
considered in order to find intrinsic value in any 
stock, that intelligent and well-informed men may 
and do disagree as to what that value is. The 
course of future conditions is subject to certain 
present conditions. If the real sources of devel- 
opment or retrogression are few and simple, a 
correct analysis is easily possible. If these 



INVESTMENT 41 

sources are many and complex, an analysis is 
correct or not, depending largely on the weight- 
ing of a very few important items. In such cases, 
any two individuals are likely to reach different 
conclusions, although both take all the important 
sources of change into account. I suppose very 
few men, who are capable to judge, would dare 
risk their reputations as prophets by definitely 
saying that United States Steel stock is at a cer- 
tain figure selling below its intrinsic value. 

In the case of United States Steel, no one knows 
the values of the immense properties, or how a 
reduction in the tariff would affect earnings, or 
how a dissolution of the corporation would de- 
crease efficiency and economy. Then, too, its earn- 
ings are subject to considerable variation on ac- 
count of industrial conditions. All these consider- 
ations, and what they suggest, must weigh in de- 
termining intrinsic value in this stock. To state 
that, say between 60 and 70, the stock is protected 
by sufficient equity in property or earning power, 
so that it may be said to have intrinsic value 
at those figures, is to lay claim to a knowledge 
which it is not reasonable to suppose anybody 
possesses. By this, we simply mean that ordinary 
good, sound, logical judgment, with reason which 
leads to correct conclusions, cannot be exercised 
with any very great degree of accuracy in cases 
such as the Steel Corporation presents to-day. 



42 METHOD IN 

Northern Pacific. 

In the case of Northern Pacific, we will see that 
there are good grounds upon which to judge in- 
trinsic value as we have defined it, without going 
into details. Northern Pacific has paid 7% divi- 
dends for a number of years. Some years have 
shown large net earnings, others not so large, but 
always there has been a growing business, because 
the railroad is in a growing country. The earn- 
ings left for dividends have lately fallen off, and 
there is perhaps some question as to a continua- 
tion of the dividend on a 7% basis. In view of 
this and to discount a reduction in the dividend, 
the stock sells around 120, yielding 5.83%. The 
outlook for the railroad as a money-maker is such 
that the demand for the stock should ultimately 
increase and the price advance accordingly. That 
approximately 7% will be earned on the common 
stock as soon as the competitive traffic over the 
Puget Sound Extension of the Chicago, Milwaukee 
& St. Paul By. Co. finds its level, is a reasonable 
conclusion after taking into account the earning 
power of the past decade, and the outlook for in- 
creasing traffic in the future. Intrinsically, then, 
this stock is worth what it is selling at now, and 
perhaps more, because there is hardly any ques- 
tion as to the ultimate future of the Northern Pa- 
cific in regard to earning power, whatever the 
immediate future may develop, either as to earn- 
ings or stock prices. This is especially true in 



INVESTMENT 43 

view of the timber and ore lands owned by the 
company. 

One who buys stocks below intrinsic values 
should not be annoyed by current fluctuations. 

In respect of intrinsic value in railroads stocks, 
the foregoing suggests that both previous earning 
power and probable future earning power may be 
profitably considered. A business that can show 
good earning capacity for over ten years, with con- 
ditions such that it is reasonable to confidently 
anticipate good earning capacity in the future, has 
a basis upon which intrinsic value may be approx- 
imately estimated. In regard to Northern Pacific. 
we made no attempt to show traffic figures and 
possibilities of increases, stock and bond capital- 
ization and its bearing on dividends, condition of 
the property as a result of maintenance policy, 
strategic location of the railroad, comparison 
with other railroads, and character of manage- 
ment. All of these points and more must be in- 
vestigated and given their proper importance, but 
the idea here is more to suggest the range of fac- 
tors that must be considered. Other books go into 
detail, and for a thorough handling of the subject 
are to be highly commended. 

Railroad Analysis. 

A few of the underlying principles, however, 
should be mastered. The simplest method is to 
divide an analysis into headings or subjects and 



44 METHOD IN 

deduce independent conclusions on these; then 
assemble these conclusions and make a final deduc- 
tion, which should be the concrete result of your 
analysis or comparison. Such an analysis should 
require only a short time, if the figures and data 
are easily available. The amount of figuring is 
not great. 

In each of the subjects, not only the present con- 
dition and policy should be considered, but also 
the policy of the company in the past. As a man- 
agement usually operates on a definite policy, any 
change in management may cause a change in 
policy. The fact that Missouri Pacific under 
President Bush is making large expenditures 
from income for maintenance, does not mean 
that the property is in good condition. It may 
have been bled for the previous decade; and this 
can be ascertained only by checking the figures 
over a period of ten or fifteen years. 

In taking up one road, practically all the sub- 
jects below mentioned should be compared with 
other roads whose territory and traffic are subject 
to similar conditions. 
(1) Capitalization: 

Comparison of the capitalization of railroads 
should be based on the miles of road owned. 
There should also be a comparison on the basis of 
total stocks and bonds outstanding, plus leases 
capitalized on a 4% or 5% basis, minus the value 
of securities owned. Gross earnings of the rail- 
roads in a given territory should bear like ratios 



INVESTMENT 45 

to the capitalization so figured. The effect of com- 
petition, contracts, agreements and affiliations 
through stock ownerships should be studied. 

If the common stock of the company only is 
being considered, the amount of underlying bonds 
and preferred stock issues should be totalled sep- 
arately to show how highly the road is capitalized, 
prior to the stock issue under question. If a bond 
issue only is being considered, it is important to 
ascertain the amount of the issues following, and 
at current quotations their value. This latter 
figure represents the equity following the issue 
under question. It is also very important to know 
whether the bond issue is a direct obligation on 
the entire system or is secured by important main 
lines or only by branch lines. Branch line mort- 
gages, not a direct obligation on the system, have 
fared poorly in reorganizations. Bond issues 
with a good margin of safety may become involved 
if the total capitalization is excessive. 

An excessive capitalization may be determined 
(1) by the amount earned on total stocks and 
bonds outstanding, after adding the other income 
to the net and taking out rentals paid and hire of 
equipment, and (2) by the relation of capitaliza- 
tion to gross earnings. The normal capitalization 
for all practical purposes may be determined by 
an average of the market quotations over a period 
of years. This represents the viewpoint of the 
investor — not the shipper, the public nor the rail- 
road official. 



46 METHOD IN 

(2) Gross Earnings: 

Note whether the total gross earnings per mile 
of road operated for the last decade have been 
gaining steadily, as compared with other roads. It 
is often the case that the purchase or building of a 
considerable new mileage changes the line of 
growth temporarily, but if the capital is increased 
only in proportion, no heed need be taken of it. 

Large passenger earnings do not by any means 
go hand in hand with stability in total gross. The 
better developed territories, where passenger 
earnings are large, have also extensive factory in- 
terests, and a period of depression in no small 
way affects these interests and their shipping. 
Stability may often be gauged by the diversity of 
traffic, and the termini of the main lines. A road, 
75% of whose tonnage consists of coal, should be 
subject to violent changes in earnings, if it is not 
a through line. If, however, the termini or imme- 
diate connections are in large cities, such as any 
tidewater city and Chicago, it is very possible that 
in time of coal strikes, it can afford to make low 
bids for higher grade through traffic, which would 
be very much to its advantage. 

There is greater stability of earning power in 
railroads than in any other form of business, but 
some roads were so poorly planned in their incep- 
tion, that the earnings are not large enough to pay 
a good return on the capital invested. New roads, 
if considered at all, must always be carefully 



INVESTMENT 47 

scrutinized as to their termini, construction and 
capitalization. 

(3) Operating Expenses: 

Operating expenses are made up principally of 
maintenance and transportation expenses. The 
most important figure is maintenance, being 
divided under the headings of (a) way and struc- 
tures and (b) equipment. Careful analyses should 
be made: — (1) of the total figures for the past 
decade to show whether the standard is being 
maintained or whether more maintenance will 
soon be necessary; and (2) analyses of at least 
current expenditure to show whether renewals of 
ties, rails, culverts and bridges are up to the 
standard. Maintenance of equipment should be 
compared in the same way for a period of years 
and also currently for maintenance per passenger 
car, per freight car and per locomotive. 

As no two roads have the same wear on their 
property, a maintenance figure alone is not val- 
uable as a unit of comparison. The wear caused 
by freight trains is due to their weight — of pas- 
senger trains to their speed. The average passen- 
ger, although having only about 8% of the weight 
of a ton of freight, may well be considered an 
equal unit to show the degree of wear. So, the 

-t index figure to show the degree of wear on a 
property is the sum of "tons of freight carried 
one mile" and "number of passengers carried one 
mile." Divide the total maintenance by this figure 



48 METHOD IN 

and the result is a valuable index figure, repre- 
senting the amount of maintenance per unit car- 
ried; and this figure should be very nearly equal 
for roads in a similar territory, although mainte- 
nance and tonnage are very different. 

The proportion of gross used for maintenance 
should not be cut, although a high maintenance 
expenditure for many years makes possible a sav- 
ing during some single year, if necessary, without 
seriously impairing the standard of the road. 

Average train load is a good check and a high 
figure should denote well maintained road, bridges 
and equipment, but a lower figure does not neces- 
sarily denote the opposite. A road which features 
in long haul traffic can average much heavier train 
loads, except perhaps in case of a commodity of 
steady demand like coal. 

Cost of "conducting transportation" depends 
upon the degree of efficiency of the management. 
For the money thus spent, the company receives 
no permanent benefit. A low percentage of gross 
used for this purpose represents economy. A con- 
trary tendency represents poor policy or ability, 
and must be throttled or it will throttle the com- 
pany. 
(4) Total Net Income: 

Total net income represents the balance, after 
all operating expenses are paid, available for pay- 
ment of fixed charges, such as interest on bonds 
and notes, rentals, hire of equipment and any ex- 
traordinary charge. 



INVESTMENT 49 

(5) Fixed Charges: 

The percentage of gross appropriated for fixed 
charges should not increase and should leave a 
surplus from 20% of gross down perhaps to 10%. 
The percentage of total net consumed by fixed 
charges, ranges from 50% to 75%. Only roads of 
extremely regular earning power should be con- 
sidered if over 75% of the net is consumed by 
the charges. 

(6) Surplus Earnings and Dividends: 

The proportion of surplus to the gross should 
be constantly increasing, or at least hold its own. 

Note the percentage earned on common stock, 
which is the most interesting of all figures, because 
not only are the "earnings" considered, but also 
the "charges" and "capitalization." In other 
words, if the earnings are increased without in- 
creasing the charges or the capitalization, this 
will show an increase in the "percentage earned 
on the common stock," which signifies true prog- 
ress, provided the proper amount is being appro- 
priated for maintenance. If, however, the in- 
creased earnings have been obtained by either 
issuing more stock or by increasing the charges, 
then the "percentage earned on the common 
stock" may be no greater, and perhaps smaller, 
than in previous years. 

Note any subsequent item entitled "other de- 
duct io < Some roads have a second charge for 
maintenance which they call "extraordinary im- 



50 METHOD IN 

provements," "betterments" or " other deduc- 
tions/ ' and when comparing the progress of a 
road over a period of years or with other com- 
panies, the per mile figure for this item should be 
considered. 

It is also of interest to note the dividends and 
the range of prices for the past ten years. The 
"dividend record" is of value in quickly obtaining 
a general idea of the stability of the surplus espe- 
cially in case of a company which has paid regular 
dividends for a long series of years. The "range 
of prices" is of value both as a suggestion and 
also in ascertaining the Investment Value. Some 
students are contented when studying surplus 
earnings to note only the "percentage earned on 
the common stock, ' 9 but this may be carried a step 
further by ascertaining the Investment Value, 
which, in the case of a common stock, is the "per- 
centage earned on this stock, at its current quota- 
tion," being obtained by dividing the per cent, 
earned by the quoted price of the stock. The 
figure for Investment Value is of interest in com- 
paring results of the same company over a series 
of years, but is of great use in comparing two or 
more stocks of the same class. 

Revenue per Passenger or Ton per Mile: 

The type of traffic being the same, the most 
favorable figures for "rate per passenger per 
mile" and "rate per revenue ton per mile," are 
the average figures for railroads in that territory 



INVESTMENT 51 

and not the very low nor the very high figures, 
because:— (1) If the company is not receiving 
proper remuneration for its work, it is either se- 
verely harassed by competition or else is handi- 
capped by restrictive legislation; (2) if the com- 
pany is receiving extraordinarily high remuner- 
ation, it is inviting competition and hostile legis- 
lation. Average figures for rates are not always 
satisfactory, as the length of haul, the terminal 
expense, and the class of traffic, are important 
factors. 

Balance Sheet: 

The stock and bond issues as shown on the 
liabilities side of a balance sheet have been dis- 
cussed above under "Capitalization." On the 
"Assets" side, the property items offset this 
capital. 

The important feature is the current account of 
liabilities and assets. A large floating debt is a 
bad sign, unless it is a necessity, connected with 
new construction. Should it be impossible to pay 
this, or refund it, trouble would ensue. An item 
of "advances" as an asset, usually represents 
money needed in some past time by a weaker sub- 
sidiary company, and is usually considered a dead 
item. Oftentimes the surplus does not represent 
anything upon which money could be obtained, 
after current liabilities are satisfied. 

A well-known contemporary recently said: — 
"By an intelligent comparison of the reports of 



52 METHOD IN 

railroad companies, it is always possible to select 
the safest of their various securities ; and usually 
it is possible to select the one whose purchase will 
show the greatest profit. By a careful analysis of 
the figures published by the railroad companies, it 
is always possible to decide whether or not said 
securities are safe and conservative as invest- 
ments. The great value of the work is self- 
evident/ ' 

Mining. 

It is difficult to find out with any degree of 
accuracy and satisfaction what the intrinsic value 
of most of the mining stocks are. This is because 
the future earning power cannot be reasonably 
anticipated, due to the many fluctuating factors in 
both mining and selling and the uncertainty as to 
the amount of ore available. If the ore resources 
are known and the approximate cost of mining, 
there is left the uncertainty as regards the pur- 
chasing demand for the metals and, therefore, the 
selling price of it after it is mined and refined. 
There are some copper stocks which have a history 
of earning power which, together with probable 
developments in the future, makes possible a gen- 
eralization as to their intrinsic value. 

John Hays Hammond, one of the very best min- 
ing engineers, made mistakes in judging proper- 
ties, and he has been quoted as saying that every 
new copper mine or mine of any kind is a specula- 



INVESTMENT 53 

tion pure and simple. In what class should those 
stock distributors be placed who make some of our 
substantial country folk believe that any mine is 
a sure thing. Call them what you will, they are 
prevaricators. Ananiases, the ever-present barna- 
cles, clinging to the ship of prosperity. 

Utah Copper. 

In the case of the Utah Copper Company, the 
extent of ore holdings can be pretty accurately 
estimated, and they are known to be great ; the cost 
of mining and refining likewise can be accurately 
determined, and it is known to be relatively small, 
about 8% cents per pound. In determining in- 
trinsic value after an investigation of the 
particular property, the greatest consideration 
must be given to the condition of the copper busi- 
ness in general; that is, the supply and demand 
and the probable course of prices for the copper 
metal in the future. If the price of the metal is 
very low or seems to be on the mend with regard 
to the next year or two — if demand seems to be 
catching up with supply and the future of business 
which requires copper appears favorable, it is rea- 
sonable to conclude that a company like the Utah 
will receive its fair share of prosperity, which 
will be reflected in increasing earnings. 

Amalgamated. 

Amalgamated Copper Company presents an- 
other story. The unfavorable arguments over- 



54 METHOD IN 

bear the favorable ones, even if one is willing to 
take past history as a fair criterion and forget 
that present conditions are not at all well-known. 
Its ore holdings are known to be large, and its 
prospecting is considered a constant expense. 
With a property so large, it seems almost sure 
that new veins will be found of sufficient quality 
to keep the output at its present rate or larger, 
for many years to come. 

The company's policy has been secrecy, and it 
is easy for one to believe that this secrecy has been 
used to good advantage for stock market purposes 
— I mean good advantage only in a financial way 
and only to the so-called insiders of that company. 

The bookkeeping shows that the surplus of the 
operating company, the Anaconda, has been re- 
duced some few million dollars within a few years. 
So from this, taken together with the fact that the 
company has only paid 2% dividends during a 
period when prices have ranged from 42 to 96, it 
appears that current quotations have little to do 
with intrinsic value or anything else but stock- 
jobbing tactics. Like Eeading, for instance, this 
stock is boomed time and time again, ostensibly to 
discount additional dividends or other bonus, only 
to decline again when it is discovered by the pub- 
lic, that the bonus is not forthcoming and the pre- 
vious rise unwarranted. Of course, the extent of 
price movements is shown to a degree through the 
study of transactions and of the market itself, but 
only in that way. 



Method 

MY METHODS are based on three axioms. 
(1) Stocks as well as bonds, if care- 
fully chosen, are good investments. 

(2) Intelligent study backed by experience 
makes possible, to a degree, a knowledge of the 
future. 

(3) The strongest financial powers make a mar- 
ket for the best securities, and they buy and sell 
the listed securities mostly through the New York 
Stock Exchange. 

Many readers will say at once that every stock 
is a speculation. Others will answer that every- 
thing on earth, including our every action, is a 
speculation — a gamble, as they put it. Another 
will say: "A man who thinks that has been 
nipped by some fake scheme." The reply will 
come in a resolute, "Never — but," he hesitates, 
"1 was interested in a company putting out a new 
patent, ? perfectly wonderful thing; and I had 
some stock, too, in a gold mine in Wyoming, that 
Mr. Smith, our bank treasurer, knew about. They 
offered stock to us in the country, because they 
didn't want the big financiers to get a hold on it." 
Some one asked what the mine was earning and 
whether he had received his big dividends. "No, 
I haven't received any dividends yet, because they 
are developing the mine, but the stuff is really 



56 METHOD IN 

there, and I'm going to get it some day without 
any doubt — Mr. Smith said so. ' ' " And your other 
stock — what of that?" "They have closed down 
the factory on account of lack of capital, but Mr. 
Johnson said they would surely make a wonderful 
showing next year." 

It would be an impossibility to show that man 
that his stock holdings were of a spurious class — 
the very crumbs off the master's table. They are 
probably so for two reasons : first, because an offer 
of fabulous returns is a sign of instability and 
recklessness ; secondly, because a statement of cer- 
tainty about the development of a prospective 
mine could not be made truthfully. 

But all stocks are not of a cheap class. Their 
value depends on the equity in the property (or 
value less all liens and mortgages) ; on the actual 
present earning power and its stability; and on 
the genuine possibilities of the near future. 

The simplest example, ownership in real estate, 
clearly shows that a property valued at $10,000 
and earning a good return on that figure should, 
if capitalized, have securities of total par value of 
$10,000. If this capitalization was $10,000 stock, it 
would represent at par the genuine value. If, how- 
ever, $50,000 stock were issued to represent the 
value of the property, the value of the stock 
should not be over 20, or $20 per $100 share. After 
ten years ' development that stock might be worth 
100 or zero, depending on the foresight and hon- 
esty of the promoter. If a $10,000 property has 



INVESTMENT 57 

$5,000 in bonds, the equity above the bonds, or 
what is left after the amount of bonds is taken out, 
amounts to $5,000, whether it is represented by 
that value of stock or a great deal more. 

Now, take a railroad with many millions of 
bonds and notes. After the interest charge is paid, 
we will say 10% is earned on the one stock issue. 
That there is a good equity in value for the com- 
mon stock is certainly true in this case, if the earn- 
ings are stable, and if sufficient maintenance ex- 
pences have been taken from earnings. Of the 
various kinds of companies, railroads have the 
most stable earnings. Take the leading systems 
of the country for ten or fifteen years, and it is 
wonderful to note how surely and steadily their 
gross earnings have increased. To get a stable 
return for the stock issue, expenses and charges 
must increase in no greater degree — and that is 
the difficulty at present. Expenses are taking up 
too large a proportion of gross earnings; and 
unless the tide turns, we will see more failures 
from our big railroads, as the expenses are in- 
creasing so as to threaten the payment of interest 
charges on the bonds or mortgages, and there will 
be default on their interest payment. While the 
balance available for interest charges decreases, 
the earnings on the stock also decrease, and so the 
value of the stock must decrease to some degree, 
especially if it becomes necessary to cut dividends. 
The stability of railroad gross earnings works for 
great stability in the earning power of railroad 



58 METHOD IN 

stock issues. Fluctuation in the earnings of indus- 
trial companies works for greater fluctuations in 
the earning power of their stock issues. The gen- 
eral movement of railroad earnings follows the 
trend of general industrial conditions, and this is 
much easier to determine than the condition of any 
particular industrial. Therefore, railroad stocks, 
as a whole, move with more regularity than indus- 
trials, and they are more satisfactory for invest- 
ment. 

Growth of Railroad Earnings (Last three ciphers 

omitted). 

— Pennsylvania — Atchison Louis. & Nash.- 

Gross Net Gross Net Gross Net 

1911 $168,118 $30,988 $107,565 $38,004 $53,993 $17,534 

1910 166,433 32,308 104,993 37,781 52,433 19,302 

1909 153,564 34,004 94,265 37,928 45,425 17,193 

1908 136,296 28,458 90,617 30,465 44,620 12,346 

1907 164,812 34,367 93,683 35,568 48,263 14,044 

1906 148,239 33,882 80,801 31,774 43,008 13,642 

1905 133,921 28,184 68,375 23,672 38,517 13,654 

1904... 118,145 25,139 68,171 27,197 36,943 13,437 

1903 122,626 25,756 62,350 25,231 35,449 12,600 

1902 112,663 26,006 59,135 26,366 30,712 10,810 

1901 101,329 21,427 54,474 22,544 28,022 10,493 

1900 88,539 18,216 46,232 18,977 27,742 9,789 

1899 72,922 11,257 40,513 13,156 23,759 8,568 

1898 65,603 10,777 39,214 10,889 21,996 7,665 

1897 64,233 11,247 30,621 8,008 20,372 6,950 

1896 62,096 9,813 28,999 6,928 20,390 7,319 

1895 64,627 11,220 28,815 6,501 19,275 7,361 

1894 58,704 9,384 33,799 8,243 18,974 7,382 

1893 66,375 9,407 41,316 12,710 22,403 8,437 

1892 68,841 9,794 38,541 11,790 21,235 7,976 

1891 67,426 10,997 33,663 9,620 19,220 7,880 

1890 66,202 10,800 31,004 10,083 18,846 8.065 

The twenty rails and twelve industrials used 
for the daily averages by the Wall Street Journal 
represent most of the active leading stocks and 
are as follows : 

20 Rails. 

Atchison, Topeka & Santa Fe. 
Baltimore & Ohio. 



INVESTMENT 59 

Brooklyn Rapid Transit. 

Canadian Pacific. 

Chicago & Northwestern. 

Chicago, Milwaukee & St. Paul. 

Delaware & Hudson. 

Erie. 

Illinois Central. 

Louisville & Nashville. 

Missouri Pacific. 

New York Central. 

Norfolk & Western. 

Northern Pacific. 

Pennsylvania. 

Eeading. 

Southern Pacific. 

Southern Railway. 

Twin City Rapid Transit. 

Union Pacific. 

12 Industrials. 

Amalgamated Copper. 

American Car & Foundry. 

American Smelting & Ref'g. 

American Sugar. 

Colorado Fuel & Iron. 

General Electric. 

National Lead. 

People's Gas Light & Coke. 

United States Rubber, common 

United States Rubber, 1st preferred. 

United States Steel. 



60 METHOD IN 

United States Steel, preferred. 

The fluctuations of the average over a period of 
years are best shown in the accompanying line cut, 
and with it is given the record of bond prices to 
show their comparatively narrow range. The 
bonds are — 

Atchison, Topeka & Santa Fe Ey. Gen. 4's Oct. 
1995. 

Baltimore & Ohio E. E. 1st 4's July 1948. 

Central of Georgia Ey. Cons. 5's Nov. 1945. 

Central of New Jersey Gen. 5's July 1987. 

Chicago & Alton E. E. (Old Co.) Eef. 1st 3's 
Oct. 1949. 

Colorado & Southern 1st 4's Feb. 1929. 

New York Central Eefunding 3%'s July 1997. 

St. Louis & San Francisco E. E. Eef. 4's July 
1951. 

Southern Ey. 1st Consolidated 5's July 1994. 

Wabash E. E. 1st 5's May 1939. 

It is very evident that stocks have greater 
fluctuations than bonds, and that, wisely pur- 
chased, they would show greater net return. To 
buy at the low point in the long swing is appar- 
ently almost impossible. Take the last weeks in 
September, 1911. Many a keen student believes 
that period to mark the low prices for a 
season, perhaps the low prices of the big 
movement downward. Others say: " Don't buy 
now; we are going to see much lower prices 
within a few months." I say that one should 
invest his current funds for neither of the above 



INVESTMENT 61 

reasons. I do not believe the reaching of the 
grand low point can with certainty be determined 
until months after it is turned. The current low 
points can be, to a degree, ascertained. The 
average of investments at these current low points 
will be as favorable a figure as that of the investor 
who buys once and holds his current funds for 
several years until another buying period is 
reached. 

I have mentioned "current low points. " You 
will note the intermediate swings on the chart. 
These extend over a period of three to ten weeks 
and are governed by the overdoing either way of 
the market. The peculiarities of this period when 
stocks are " oversold' ' and the period when stocks 
are "overbought" are numerous enough to fill a 
book, and they would be of no great use here ; in 
fact, they might do harm in creating an impres- 
sion that it is safe to speculate on that basis. 
Whether it is or not for some people, it certainly 
is not for anyone unless they make an extremely 
thorough and careful study of the whole subject, 
and I will assure you that a few years of this study 
is not overmuch. 

Could you run an airship safely without a period 
of study and a natural leaning that way? No — 
but you could sail one, and if lucky enough to be 
successful the first time, your chances for coming 
down alive the next time would be small, indeed. 
Overconfidence is a fault of youth and is easily 
bred bv one or two successes. 



62 METHOD IN 

The comparison continues with the air expert 
who knows all there is to learn. His safety de- 
pends largely on his knowledge of air currents and 
the method of running the machine ; but even with 
all possible knowledge and safety devices, he might 
come to a vacuum in the air — the whole bottom is 
out of the market — and , whether he was ready or 
not, he cannot right himself until he is out of the 
vacuum. If his balance, which in one case is mental, 
does not return then, he is smashed, in the one 
case physically and financially in toto, but in the 
other case partly physically and partly mentally 
and partly financially. 

However, the terms should be explained. When 
stocks have been advancing for several weeks 
there comes in more and more buying — and much 
of this is speculative, and therefore from weak 
sources. The market would then be called "over- 
bought" and a slight reverse would force back 
onto it much of this stock. As a result, a further 
reaction would take place. The same rule works 
when the market is "oversold" — that is, many 
traders have sold stocks which they did not 
own and have borrowed the stock for de- 
livery, or, in technical language, "sold short." 
This prepares the way for a turn into an 
advance. Now I am sure that it is possible 
for a careful student to determine these general 
turning points three times out of five. The big 
operators control these swings largely, and it is 
upon their operations that we put the glass. Ex- 



INVESTMENT 63 

cept in unusual cases, all transactions are traded 
on the stock exchange, and it is a careful study of 
these and their connection with the money market 
which brings the best results. 

News — To place much faith in rumors or reports 
or interviews, is a mistake, although they often- 
times call attention to points which could bear in- 
vestigation, thus determining the truth of the 
report. Those who have the facilities for this 
investigation into the truth of such reports, derive 
great benefits. For example: In January, 1912, 
reports were current that a coal miners' strike in 
March and April would make a deep cut into the 
earning power of the hard and soft coal roads, or 
either one, if the strike was localized to the one 
district. I immediately took a soft coal road, the 
Chesapeake & Ohio, to find out the effect of the 
1902 strike, which included the soft coal fields 
of West Virginia. To my surprise, although coal 
constituted 50% of total tonnage in the year ended 
June 30, 1902, and the following year only 39%, 
a decrease of 22%, the gross earnings decreased 
only $300,000, or less than 2%. Fuel, however, 
cost $400,000 more in 1903, and net earnings 
were not so strong, although very strong con- 
sidering what I expected. Unless one gets at the 
underlying facts — examples of the past under sim- 
ilar conditions — it is impossible to come to any 
correct decision. There are too many "ifs" to 
make the judgment of any value. 

Another "if" in the present coal situation 



64 METHOD IN 

comes from the fact that it is international, and 
dearth of coal in England and Germany may en- 
tirely change the home situation. 

Of actual and concrete news, we have several 
kinds: (1) Events that are expected but which 
are beyond the power of anyone to definitely con- 
trol, such as elections, conventions, court decisions, 
laws, etc. (2) Events that are entirely unexpected 
and unforeseen, and which no one can possibly 
control, as accidents, fires, earthquakes, etc. (3) 
Events that are expected, and which, while they 
may not be controlled, can be manipulated or post- 
poned or so adjusted as to facilitate the desires of 
certain individuals or concerns ; for instance, cor- 
poration reports, failures, favorable or unfa- 
vorable decisions among directors of an institu- 
tion, etc. 

The effect on prices of the first classification 
depends largely on the importance of the event, 
the public sentiment and the power of any factor 
interested in the result. If it be important court 
decisions — such as the American Tobacco and 
Standard Oil cases, or impending laws which no 
one can foresee, and the results of which are 
doubtful, the market generally stagnates. This is 
especially so when public opinion is strongly 
directed to one result and the people are clamor- 
ing for certain reforms. 

On the other hand, if the event be an election 
or convention, where it is possible for extensive 
interests to estimate the result with reasonable 



INVESTMENT 65 

accuracy, prices will likely be manipulated, so that 
when the public finally learns the news, prices will 
already have discounted the situation and be 
ready for a reversal. When it so happens that 
the unexpected occurs, enforced liquidation or else 
purchase of stocks by the big operators becomes 
necessary, and sharp breaks or advances in prices 
develop. 

In the second division — unexpected events — we 
find that genuine, bona fide news has a sound, 
rational effect on prices, depending on the im- 
portance of the happening and the securities im- 
mediately affected. If the event is one that vitally 
affects several important stocks the entire market 
is likely to respond to the influence. If, however, 
only minor securities are affected, the fluctuations 
would probably be confined to the few securities 
immediately concerned. In fact, the leaders might 
even take the opposite trend. 

The third division, and the one having the most 
significance to investors and speculators is 
expected events under the control of influential 
individuals. Take, for instance, the dates when 
annual corporation reports are issued. The abuse 
of this matter in the past has been very frequent. 
The annual report of Union Pacific was always 
led very tardily. Many believe that this helped 
Mr. Harriman's personal plans very much, but 

ssibly he was justified, as the publication of the 
new list of securities owned might have caused an 
immediate change in certain stock quotations. The 



m METHOD IN 

benefit from this, however, all went into the 
pockets of the directors of the companies involved 
and to others who knew the facts and their prob- 
able effect on values. When the public knew it, 
the report was of no use. 

Another kind of news that often has a marked 
effect on prices, but which is generally circulated 
for a reason, is interviews with influential men. 
Sometimes these statements are sincere and have 
an enlightening effect, but more often they are 
given out to counteract or develop a condition 
existing in the market. The effect of such news is 
almost invariably dependent upon the technical 
condition of the market — whether it is overbought 
or oversold. 

The following statement will probably surprise 
some and be challenged by others, but neverthe- 
less, it is true. News, of the Wall Street kind — 
paragraphs on the financial page — is more often 
the result rather than the cause of fluctuations. In 
other words, a great deal of so-called news is only 
rumor circulated to explain some break in prices. 
The public believes the fluctuations due to these 
rumors until the real facts become known. 

James J. Keene was a very clever operator and 
manipulator of prices. How did he do it? As 
much by the manipulation of news as by his care 
and foresight in trading. Thomas Lawson had 
his day, and some speculators, and even investors, 
believe in him now. His following, however, was 
located very largely out of town and was reached 



INVESTMENT 67 

by extremely sensational news advertising, which 
cost at times thousands of dollars a day. Some- 
one paid for this advertising, but no well-informed 
person believes that it really came out of Mr. Law- 
son's pocket. 

The only news that has a logical effect on prices 
is that which is entirely unexpected, and which no 
one can foresee. The value of other kinds of news 
to investors or speculators is practically nil or 
worse. Always judge how long the big operators 
and insiders have had the facts, for if they have 
been acquainted with them, prices are doubtless 
adjusted to discount the change in conditions. 

Method. 

What, then, is my method, which secures the 
best return for capital over a series of years? 

(1) Buy stocks when around or below intrinsic 
values only. This is necessary for practical 
reasons, also for mental ones. Stocks should not 
be considered a purchase, when they are above 
their intrinsic value. One cannot buy a security at 
such a price and forget it; he is always on the 
nerve to see whether he has gauged the future 
correctly; he is outside of the realm of invest- 
ment. 

2) Buy bonds only when the intrinsic value 
figure of good stocks is exceeded— bonds whose 
principle features are — 

(a) For the permanent holder — security and 
yield. 



68 METHOD IN 

(b) For the holder who desires to later re- 
invest in stocks — security, but also stability in 
price and easy marketability (or convertibility 
into cash). 

The purchaser for permanent holding will 
secure higher yield with equal security, if he does 
not demand convertibility into cash and stability 
in price. As he avowedly does not care for these, 
the big majority of his holdings should reflect that 
fact. Investment in bonds is the best disposition 
of money when stock prices are high. A better 
yield is secured, and it is steady. Bonds of a 
doubtful nature should not be purchased, as they 
are often subject to more violent fluctuations than 
standard stocks. 

(3) Buy only those securities from the great 
assortment, which at the particular time are the 
cheapest, judging from a study of intrinsic values 
as explained in a previous chapter. This study 
should be done by one who does the work purely as 
a vocation — not an avocation — his day work, and 
not his night work. Every man who carries his 
common sense into investments tries to do it as an 
avocation, and many fail for the same reason that 
their legal reasoning fails without the assistance 
and experience of a competent lawyer. Choice of 
the best purchase requires not only a thorough 
knowledge of statistical analysis, but also an in- 
vestment knowledge. It requires both in a high 
degree, and it is an impossibility with the average 



INVESTMENT 69 

trustee, bank official and business investor. Their 
duties take up their best energies and time. 

(4) Distribute your holdings over areas which 
are subject to different conditions, both geograph- 
ical and industrial. This is explained in a previous 
chapter and is founded on the laws of nature, as 
well as the law of averages. The section of the 
country dependent on the grain crops may be 
abounding in prosperity, while another dependent 
on cotton is depressed; and the cotton crop affects 
not only the South, but New England industries, 
in the same way that grain crops affect not only 
the middle west but, to a certain degree, the man- 
ufacturing industries in general. An earthquake 
in San Francisco or a fire in Chicago affects the 
local public service corporations materially, as 
well as the price of the municipal bonds and the 
securities of the manufacturing companies whose 
valuable property is destroyed, but neither affects 
at all the public service corporations in another 
locality. 

(5) For those who desire to re-invest to advan- 
tage:— 

(a) When conditions appear bright and stocks 
are selling at very high prices, sell stocks and bay 
bonds of good security, of proven stability in price 
and convertibility into cash. 

(b) When stocks again reach a very low level in 
accordance with the inevitable reaction, sell the 
bonds and buy stocks again. 

(c) Do not exchange one bond for another, 



70 METHOD IN 

unless under extraordinary circumstances. 

Ee-investing advantageously is largely a ques- 
tion of temperament. The man who is willing to 
do it will reap his reward if he does it at the 
logical time. A sporting man was recently left a 
small fortune, his only source of income. He found 
the income too small for his purposes, so he made 
exchanges for other bonds of higher yield, and did 
this several times, only to find himself in three 
years the owner of certain defaulted securities. 
His re-investment was of the wrong kind. He did 
it when he needed the additional income, rather 
than at a time when he could get equal or better 
security by converting from one kind of a security 
into another. He lost in principal every time he 
made an exchange, and, although temporarily his 
income was enlarged, it made him eventually go 
to work for a living. When stock prices are at the 
highest, as shown in the table under (2) above, 
bonds as a class yield a better return ; and at such 
times a conversion of one's holdings into bonds 
is advantageous, because bonds do not decline so 
much as stocks in any reaction to come — and 
unless a poor selection of bonds is made, the 
income return will not be reduced. Later, when 
stock prices are unusually low, the bonds can be 
converted into stocks again to advantage, because 
the bonds decline but a few points which is more 
than paid back by the interest return. 

The results from such method in investment 
give the biggest income returns with the best se- 



INVESTMENT 73 

curity. It is real investment — the use of capital in 
such a way as to obtain the best, return consistent 
with a high degree of safety. The intelligent in- 
vestor seeks the best method of securing the best 
return from the best securities. 

-Average Quotations- 
Bonds. Sept., 1909 Sept., 1911 Loss 

Atchison, Gen. 4's 1995 100* 98 J 1| 

Central of Georgia, Cons. 5's 1945 1091 1081 1 

Central of X. J.. Gen. 5's 1987 127 123 4 

Chicago & Alton. Ref. 3's 1949 78 70 8 

Colorado & Southern. 1st 4's 1929 98 95 3 

New York Central, Ref. 3J's 1997 911 87* 4J 

St. Louis & San Francisco, Ref. 4's 1951 851 79 61 

Southern Ry., 1st Cons. 5's 1994 Ill 1051 5* 

Wabash, -1st 5*s 1939 113* 1071 _5| 

Average loss of principal 4| 

Interest received in two years 8i 

~T 

Stocks. 

Amalgamated 81 52 29 

Atchison 120 102 18 

Chesapeake & Ohio 84 71 13 

Chicago, Milw. & St. Paul 159 111 41 

Missouri Pacific 70 37 33 

New York Central 135 102 33 

Northern Pacific 155 114 41 

Pennsylvania 145 120 25 

Reading 165 139 26 

Southern Pacific 129 108 21 

Union Pacific 202 162 40 

United States Steel 4 83 62 2A_ 

Average loss of principal 29 

Dividends received in 2 years 10 

IT 

From above quotations it may be deduced that if one of each 
of the nine bonds had been purchased in September, 1909, and 
sold in September, 1911, there would have been, eliminating in- 
terest, a return of $3.93 per $100.00 invested. The result is se- 
cured as follows: — The total loss in market value was $4.50 per 
hundred dollars par value of bonds. Interest received amounted 
to $s..")U per hundred dollars of bonds. The difference shows a 
gain of $4.00 per $100.00 par value of bonds, but these bonds 
cost in September, 1909, an average of $102.00. Reducing this, 
the amount of income return for the two years totalled $3.93 per 
hundred dollars invested. 

Taking the listed stocks in the same periods, it works out 
that if or»H share of each issue had been purchased at the average 
• •rnber, 1909, and sold at the average price of Sep- 
tember, 1911, a loss of $14.85 per $100.00 invested would have 
resulted. The total loss in market value was $29.00 per hundred 
dollars of stork. Dividends received amounted to $10.00 per hun- 
dred dollars of stork. The difference shows a loss of $19.00 per 
$100.00 par value of stock, but these shares cost in September. 

. an average of $128.00. Reducing this to a hundred-dollar 
basis, the loss in the two years per hundred dollars invested was 
114.85, plus the $8.00 to $10.00 which should have been avers 
for interest. 



IT is perfectly possible for the 
average man to increase his in- 
come from 33 to 50 per cent, 
with no additional risk. He can do 
so by following the plan outlined in 
this book. As the operation of this 
plan requires constant study, those 
who have not the time, facilities, 
capability or experience to do this 
work should subscribe to 

Investment Analyses 

which analyze each week the particular 
security that my office, after thorough 
study, considers best for investment at that 
particular time. If conditions are especially 
inflated and unsatisfactory for investment in 
a security of one class, there is usually some 
other which is satisfactory. This plan is 
much more lucrative and satisfactory for the 
average man than one which requires the 
holding of one's capital over a long period, 
during which much interest is lost. 

The service is designed for trustees, executives, pro- 
fessional men and investors, large and small. 

Readers of this book should send for Booklet Ten 
and Specimen Reports, sent gratis on request. 

OFFICE OF 

EDWARD W. SHATTUCK 

Investment Counsel 
24 STONE STREET NEW YORK 



AY 2 1912 



